Creating a new medical device is not an inexpensive exercise. There are development costs, clinical trial expenses, and the lengthy process of getting a piece of new equipment approved by the Food and Drug Administration.
Those hurdles are a leading reason why most medical innovations come out of universities or established research firms.
A couple of start-ups are trying to change that.
“There’s a lot of capital sitting on the sidelines,” said Sean Schantzen, co-founder and chief operating officer of Healthfundr, a platform allowing accredited investors to buy shares in fledgling medical start-ups. “We bring more capital into what we consider a very important sector, that otherwise may not be in play in that area.”
But while new fundraising methods could create new entrepreneurial opportunities in the medical field, some are worried unsophisticated investors could underestimate the risks, or worse — patients desperate for a cure might throw away money chasing ideas developed outside conventional regimes.
“When you’re going to put a drug in a human being, you can’t do it in a garage. You have to use the clinical trial infrastructure,”said Margaret Anderson, executive director of FasterCures, the medical branch of the Milken Institute, an economic think tank headquartered in Santa Monica, Calif. “That’s how we’ve built our system, to ensure people aren’t taking magic potions and being exploited.”
Indeed, the lure for a cure can be powerful. For MedStartr contributor Kari Ulrich — a patient with fibromuscular dysplasia, a rare vascular disease — the promise of medical solutions for her disease motivates her donations. She hasn’t yet contributed to any biomedical devices, but she did give over $1,000 to help develop “FMD Chat,” an online community focusing on her malady.
MedStartr allows entrepreneurs to collect financial contributions from the public in exchange for rewards — pre-orders of services or devices, for instance. Due to regulations about unaccredited investors from the Securities and Exchange Commission, users can only contribute to — and not invest in — projects on the platform..
Ulrich feels better donating to individuals instead of large, national organizations fundraising for medical cures. “You don’t know where [the money] is going. Sometimes these smaller projects never get a chance.”
But in the case of medical devices, it could take years to develop investment expertise, said Yaniv Sneor, founder of Mid Atlantic Bio Angels, a New York-based angel investment group.
“It requires a good understanding of the market, and understanding of the science as well. The science can be very tricky. Also, you have to look at where you think the science is going to be in a few years.”
It could be years before a device hits the market, during which it might change completely — the average crowdfunding contributor might not understand these market nuances, he added.
So far, at least 18 projects have been successfully funded on MedStartr, founder Alex Fair said. These have included a film about patient empowerment and a start-up allowing customers to give services to each other, such as dog walking or yard work. Based on data from last year, MedStartr projects raise an average of $12,000, but many projects have raised venture capital investments offline after gaining traction on the site, averaging about $405,000, Fair said.
Some have fallen short in their fundraising goals. Albert Kretz thinks he’s close to creating an artificial pancreas for diabetes patients, if he could just raise enough capital. An academic earlier in his career, Kretz no longer has institutional affiliation — he is currently working out of his home in Mentor, Ohio, developing a glucose monitoring micro-needle with which patients could painlessly prick a finger, eventually transmitting glucose level data to a fabricated pancreas.
Kretz made a Web page on MedStartr, sometimes offering pre-orders of the possible pancreas in exchange for financial contributions.
He called his project the “Diabetic’s Dream,” requesting $60,000 to “prove the micro-needle is effective” with a pilot study, noting that the needle would need to clear several trials before it would be eligible for FDA approval, a process which could take years and could be very costly.
He included a warning to potential contributors: “We may fail. If we fail, we cannot offer a refund,” he wrote on the site.
Kretz’s fundraising campaign lasted several weeks, after which only two people — a diabetic patient and a friend of that patient — had contributed a total of $5,100 to the cause. Kretz will keep the funds, but plans to pursue other forms of funding.
Though the MedStartr team — a combination of medical scientists and programmers — can’t guarantee the success of a project on the platform—it vets projects for what the team perceives as clinical merit. MedStartr performs several rounds of background checks on each project before it’s featured on the site, including confirming the entrepreneur’s credentials and assessing its likelihood of success.
The New York-based company usually takes between three and eight percent of funds if the entrepreneur’s funding goal is met, and currently features about 10 active projects.
HealthFundr features a handful of projects on its platform at a time, whose creators are usually raising between $2.5 million and $5 million. Its founding team — comprised of medical doctors and securities lawyers — vet the projects based on their personal networks and their assessment of viability, taking a cut of capital raised.
“One of our big focuses...is selecting and working with companies with businesses whose models can be understood by investors who may not have the expertise a physician would,” Schantzen said. “A lot of these companies are capital starved, some of them limp along and they have to get acquired quickly. A lot of companies are very useful, and many of them prematurely die.”
But even if the entrepreneurs can raise enough capital to clear regulatory approval, doctors still have to adopt the technology, said Richard Toren, a serial health care entrepreneur instrumental in creating the EpiPen.
“[Doctors] are very conservative buyers,” Toren said. “They’ve all seen hopes and dreams of products and device and drugs and they’ve — rightfully so — become somewhat skeptical.”